What if HSA contributions exceed the eligible individual’s limit?
HSA contributions that exceed the contribution limit for the year, or contributions made by an ineligible individual, are considered excess HSA contributions. Excess contributions cannot be deducted on the individual’s tax return. Excess contributions made by employers are included in gross income by the employee to the extent they exceed the contribution limit (i.e., the employer must include this excess amount on the employee’s Form W-2, Wage and Tax Statement, as taxable wages).
A six percent excess contribution penalty tax is imposed on the HSA owner for each tax year the excess contribution remains in the account. If, however, the excess contribution for a tax year and the net income attributable (NIA) to the excess are paid to the owner by his or her tax return deadline, plus extensions (or by the end of the automatic six-month extension, for timely tax return filers), the excise tax does not apply. The excess contribution is not taxed when distributed, but the NIA is included in the HSA owner’s income for the tax year in which the distribution is withdrawn, and is generally subject to an additional 20 percent penalty tax.